Suit Accuses Bankrupt N.j. Insurance Firm Of Racketeering

Officers, directors and parent corporations of the bankrupt Integrity Insurance Co. have been accused in a civil suit of racketeering and draining the company of cash.

The New Jersey Department of Insurance filed the suit Wednesday in Bergen County Court.

The Paramus company reneged on paying Allentown its share of a $500,000 settlement of a lengthy police demotions suit against Mayor Joseph S. Daddona and former Police Chief Carson Gable.

The suit will have no immediate effect on Allentown's recovering $379,212 still owed in insurance funds for the settlement, city and New Jersey officials said.

The suit seeks triple damages from those charged for alleged fraud, negligence, diversion of assets, unlawful declarations of dividends and breach of fiduciary duty.

Also named as a defendant is the independent accounting firm of Touche Ross & Co. for malpractice, negligence and breach of contract.

In January, Allentown settled a suit with four policemen who said they were demoted in 1982 because they opposed Daddona's re-election. Each of the plaintiffs was paid $125,000.

Lloyds of London reimbursed the city $147,555 and said that was the extent of its responsibility.

Attorney Alan M. Black, who is representing the city in its insurance claim, and Russell S. McKenzie, city risk manager, said yesterday the action has no effect on the city's claim filed with the Pennsylvania Insurance Guarantee Association. The association has balked at paying the money.

They said if Allentown is unsuccessful in Pennsylvania, it will get in line with other Integrity creditors to get a piece of the award stemming from the New Jersey court suit.

Len Karp, a spokesman for the New Jersey Department of Insurance, explained that any money the defendants are ordered to pay would be placed in a trust from which creditors would be paid.

The department said: "It is impossible to predict at present whether Integrity's policyholders will receive any compensation from the assets of Integrity, and if they do, how many cents on the dollar they can expect to receive."

Black said the city has not yet filed suit in Lehigh County Court against the Pennsylvania association. The intention to file was announced five weeks ago.

He explained that the city is hoping to resolve the issue without the need for costly litigation.

"I personally expect we will be successful and recover what is owed us through the association," he said.

The claim against Integrity was transferred to the association after the company went bankrupt. The association is established and financed by insurance companies to handle claims against bankrupt insurers.

The association delegated Curley Adjustment Service of Philadelphia to handle the claims of Pennsylvania insured. The adjustment service disclaimed Allentown's coverage.

"It was a grossly arbitrary refusal to make payment," Black said.

The New Jersey civil suit alleges Integrity's owners violated the state's Anti-Racketeering Law by engaging in a pattern of fraudulent practices, including the material misstatement of company's assets as well as mail fraud.

Insurance Commissioner Kenneth D. Merin said the results of his department's investigation have been forwarded to the attorney general to determine if criminal charges should be filed.

The suit accuses former company President Christian Yegen of Tenafly and others of doctoring financial records to convince regulators and customers that Integrity was sound and able to pay its claims.

It describes the company's deficit at more than $300,000, one of the largest insurance failures ever, state officials said. The state said the deficit eventually may exceed $1 billion when all the claims are settled several years from now.

"The collapse has had a major impact, not only on people who bought insurance, but on the industry, because it has raised questions about its ability to carry out its mission."

The state charged that Integrity was insolvent as early as 1981, six years before the state ousted the owners and took control of the company.

To hide its financial woes, the company periodically transferred cash among related corporations and fraudulently inflated its worth by claiming uncollectable debts as assets, according to the state. Company officials also authorized up to $13 million in illegal dividends to shareholders and furnished falsified reports to the state Department of Insurance, the federal Securities and Exchange Commission and other regulatory agencies, the state alleged.

The investigation was undertaken by Commissioner Merin, acting as liquidator of Integrity Insurance Co. last year after the company was found to be insolvent.

The suit alleges that Touche Ross was negligent by failing to detect and disclose Integrity's financial position and that operating results were materially misstated in 1980-85.